Ethical Sourcing: Do Consumers and Companies Really Care?

It seems there is a continuous stream of companies announcing new efforts to become more sustainable and engage in ethical sourcing practices. But do people really care about ethically sourced goods? Some reports say consumers do, while other research shows it doesn’t actually change shopping habits.

For companies and supply chain organizations, ethical and sustainability efforts are often linked to business factors like reducing costs and improving brand image. We take a look at how ethical sourcing is shaping the way products are produced and sold today, and if it’s having an impact on what people are actually purchasing.

Ethical sourcing is the process of ensuring the products being sourced are obtained in a responsible and sustainable way, that the workers involved in making them are safe and treated fairly and that environmental and social impacts are taken into consideration during the sourcing process. According to the Chartered Institute of Purchasing & Supply (CIPS), ethical sourcing also means the procurement process respects international standards against criminal conduct and human rights abuses and responds to these issues immediately if identified.

According to Steve Polski, senior director of responsible supply chains and sustainability at Cargill, consumers consistently say they want more sustainable products and services but are often unwilling to pay a premium. Polski has spent years researching this topic, and he has found that consumers care about a company’s sustainability and ethical sourcing efforts and may reward it with brand loyalty, but they generally don’t want to pay more for the products.

“We know this is a growing area of opportunity for businesses throughout the supply chain, but there is limited data that supports consumers are willing to pay more at the checkout counter,” Polski said. “It requires businesses to think creatively about the economic incentives for sustainability programs, which include supply chain and operational efficiencies.”

When it comes to behavior of businesses, Polski said companies often commit to ethical and sustainable practices for one of three reasons: 1) to mitigate risk 2) to reduce operating costs or 3) to elevate their brand image to grow sales.

Bob Ernst, who serves as the director of procurement infrastructure at KPMG and is also involved in the company’s supplier diversity and sustainable procurement efforts, said awareness around sustainable and ethical sourcing has really grown and company efforts are not only just about building up a brand.

Yes, sustainable practices and even supplier diversity efforts, are “feel good” initiatives for businesses, Bob said, adding he is proud to work for a firm that embraces those principles. These practices also serve as a competitive advantage, especially when it comes to recruiting young talent out of college, as Bob said many of those entering the workforce are very sensitive to sustainability. However, Bob added, companies still practice sustainability and ethical sourcing for “the right reasons.”

“The reality is, a lot of people care, and I mean a lot of people,” he said.

The Consumer Side

A recent study by GT Nexus, a cloud supply chain platform provider, showed there is a demand for ethically and sustainably sourced products. The survey of more than 1,100 U.S. consumers found 52% said they would pay more for food and beverage products that were sourced under ethical and sustainable means. When it came to clothing and footwear, 45% of consumers would pay more for such products and 44% of consumers would pay more for ethically sourced over-the-counter pharmaceuticals.

The survey also found just how much consumers said they were willing to pay for ethically and sustainably sourced products. Thirty percent said they would pay up to 5% more and 28% said they would pay up to 20% more for such products. A quarter of consumers also said they actively sought sourcing origin information when they made their most recent purchase.

Actions May Speak Louder Than Words

Such findings would make companies believe ethical sourcing practices are not only good for the welfare of workers and the environment but also a smart business tactic. However, other research on this topic showed that while consumers say they care about this issue, they do not actually follow through when it comes to shopping habits.

Take, for instance, the findings from a study conducted by Nielsen that tried to separate “passive eco-friendly” consumers from passionate ones. Respondents were largely in support of purchasing goods that were sourced ethically, with 40% of North American study participants saying they were interested in buying from socially responsible brands. Yet when asked if they check the labels on products to ensure the company was actually committed to making a positive social and environmental impact, just 32% of North American participants said they took such action when purchasing a product.

Another study by Hershey and Kansas State University showed evidence that some millennials in particular may be among these “passive eco-friendly” consumers. The study, “Millennials and Chocolate Product Ethics: Saying One Thing and Doing Another,” stated that while millennials (identified as “MGs” in the report) said they cared about factors such as organic and certified ethically sourced ingredients in their chocolate, when it came time to buying the product, few took such factors into consideration.

“[E]ven those MGs expressing a desire for factors like organic or certified ethical sourcing often confessed that they were unwilling to pay the substantially higher price necessary to obtain these product characteristics,” the report said. “The choice study revealed that for most MGs in our sample, the preferences for the social factors were small and thus unlikely to outweigh dominating factors like price, brand and ingredients.”

A recent Quartz article also pointed to a 2005 study that showed consumers actually avoid learning about how or where a product was sourced so they do not have to address possible negative emotions. Another more recent study by the Journal of Consumer Psychology showed that more than 85% of the 147 students surveyed chose not to learn about the ethical sourcing efforts behind different brands of jeans.

Companies Taking Note

Despite studies like those above creating some level of doubt about purchasing habits, it seems many companies are taking consumers at their word. Brands continue to promote ethical sourcing and sustainability efforts. See the recent announcement from Denny’s on its move to cage-free eggs as an example:

“We believe our guests care about how their food is sourced and so do we,” Denny’s President and Chief Executive Officer John Miller said in a statement. “For more than 60 years, we have listened to our guests to understand what they care about the most, without sacrificing on quality, taste or value. The humane treatment of animals remains an important part of our brand’s sourcing strategy, and our commitment to this transition underscores our confidence in the ethical evolution of supplier capabilities.”

There is opportunity for ethical sourcing and sustainability efforts, such as the one demonstrated by Denny’s above, to prove profitable for companies and to spark positive change. Polski of Cargill is also leading a joint business relationshipbetween Cargill and PricewaterhouseCoopers to help companies improve supply chains, which involves addressing social and environmental issues.

Overall, Polski said, the conversation over ethical and sustainable products is good to have, as it may make consumers think about changing their behavior and paying more attention to what they are buying.

“Businesses today are looking at sustainability differently than they were even a few years ago,” Polski said. “It’s an exciting time to be working on supply chain sustainability and I think we’re approaching an inflection point among consumers as well.”

Voices (2)

This is true. After speaking to some of our potential clients in the USA to be specific. Consumers would tend to buy more when they would know that the products are being ethically sourced and helped the farmers in the local community and the social issues attached with the product.

I wanted to bring up two additional points that I think are critical in this discussion.

Dodd-Frank legislation came into effect requiring companies to trace the minerals they use in production to ensure they are not fueling armed conflict. This punitive approach has proven very successful in forcing companies to trace their mineral supply chains to ensure compliance and ethical sourcing.

Secondly, there has been a rise in the number of NGOs who are naming and shaming companies that have very poor knowledge of their supply chains (and the countries and companies involved). One recent report focuses on the electronic industry and the extent (or lack of) that some of the worlds largest companies understand and trace their supply chain. These types of reports plan to tip the scales towards more ethical sourcing, and drive consumer behavior.